The Eritrea-Ethiopia Peace One Year On: Prospects for Business

Notwithstanding increased political and diplomatic cooperation between the two countries, on the ground implementation of key economic and security provisions of the agreement is lagging. 

Rapprochement between Eritrea and Ethiopia is key for much needed regional economic cooperation, but more is required to translate peace into investment and business opportunities. 

There remains critical opposition to the agreement within Ethiopia, particularly from the Tigray region, while growing ethno-nationalism in Ethiopia can seriously complicate matters. 

On 9th July, 2018, Eritrea and Ethiopia signed the Joint Declaration of Peace and Friendship, ending a 20-year dispute. This milestone was soon followed by the ‘Jeddah Agreement’ on 18th September, which resulted in the reopening of trade and diplomatic relations, leading to official visits by respective leaders, the re-establishment of embassies, the resumption of international flights, and the re-connection of telephone lines, allowing families divided by a heavily militarised border to communicate with and visit each other for the first time in decades. 

Peace between Eritrea and Ethiopia is a key element to launch much needed regional economic and investment cooperation in the Horn of Africa. Landlocked Ethiopia is currently relying on the port of Djibouti for approximately 95% of its exports and 90% of its imports. There is growing concern over the ability of the port of Djibouti to handle the economic needs of Ethiopia, a country of more than one hundred million inhabitants. Access to Eritrean ports (as well as Somaliland) is thus a key element to enhance Ethiopian economic development. A feasibility study for the construction of a joint Ethiopia-Eritrea railways has been launched in June, with the support of the Italian government and the World Bank. 

However, one year after the peace agreement, key provisions remain to be implemented. The Ethiopian army has not yet withdrawn from the contested Eritrean town of Badme, despite Ethiopian Prime Minister Abiy Ahmed’s commitment to do so. The two countries have not yet agreed on the exchange rate of their national currencies, a key requirement for any meaningful economic cooperation. Furthermore, in April, Eritrea closed all its border crossing roads with Ethiopia, without providing an explanation.

More importantly, there remains resistance to the implementation of the agreement from the leadership of the Tigray region, which was once dominant in Ethiopia but now ousted by key government positions in Addis, following the arrival of Prime Minister Abiy in power. Since the region of Tigray borders with Eritrea, its buy-in remains key for the smooth implementation of cross-border trade and economic activities. Although it accounts for only six per cent of Ethiopia population, the Tigray region is the most military-prepared and politically-disciplined federal state of Ethiopia. 

Concerns of growing ethnonationalism in Ethiopia and opposition from powerful regional leaders may hamper Abiy’s broader reform programme and have a serious impact on Ethiopia’s stability, as the late June coup attempt from the Amhara constituency illustrated. Abiy will be now totally focused on navigating domestic politics, with little time – and political capital – to spend on implementing peace with Eritrea. At the same time, many are sceptical about the real interest of Eritrean President Afwerki in implementing the agreement, as it would open Eritrea to all kinds of democratic pressures from Ethiopia. Eritrea remains a closed security system and Afwerki is one of the longest sitting African presidents.  

In the short-medium term, our base case scenario (representing a 50% probability of occurrence) is a continuation of the status quo. The two countries continue political relations, but fail to make significant progress on economic and trade cooperation. Ethiopia’s economic liberalisation agenda survives, but at a slow pace. Eritrea continues to be an attractive market for large multinationals in the extractive sector, but remains a highly difficult (and risky) landscape for foreign companies. 

However, the possibility of a deadlock in Ethiopia is not negligible (a 25% probability), particularly if Abiy starts losing legitimacy and 2020 elections are postponed. Ethno-nationalism and intercommunal violence – at the highest level of intensity in twenty-five years – can lead to demands for self-determination from increasingly autonomous regions and, most worryingly, the country’s fragmentation along ethnic lines (as in the case of former Yugoslavia).

An improvement of the situation is equally unlikely but possible (a 25% probability). Confronted by reality, Abiy could engage seriously with different constituencies in the country, including the Tigray region leadership. The Ethiopian economy recovers thanks to foreign acquisitions of key Ethiopian telecommunication and aviation companies. Ethiopia returns as a strong and stable regional actor. The military withdraws from remaining Eritrean territory. Lastly, Eritrea has no option other than to start meaningful economic cooperation with Ethiopia and gradually open up as a destination for foreign businesses. 

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